Growing Dividend REITs

I first discovered Sovran Self Storage (NYSE:SSS), or Uncle Bob’s Self Storage, as it is known commercially, during my weekly grocery visits in Somerville, MA. The location I noticed is a discreet brownstone, although their more recent sites have an office building look with bright signage. Since its foundation in 1985, Sovran has been serving millions of customers at 518 properties spread across 25 states.

The company has an impressive dividend distribution history of 19 years with only 2 dividend reductions – one in 2009 and another in 2010. Compared to the largest REITs in its category, Sovran has a relatively small market capitalization of US$3.3 billion (as of March 31, 2015), but for that same reason, it has greater potential for growth. For comparison purposes, Public Storage (NYSE:PSA) has over 2,200 storage facilities and a market capitalization of US$34 billion. Sovran has exhibited faster growth rates than Public Storage.

Performance

Sovran has an impressive projected growth profile for 2015: Dividend growth of 10 percent, Q4 dividend growth of 10 percent, and FFO per share growth of 17 percent. In addition, the number of facilities in operation rose from 478 to 518 with more planned for 2015.

Operationally, the company has been able to grow revenues both from existing facilities and by adding new facilities. Occupancy has increased slightly in 2014. The only caveat is 39 percent of location revenues are generated from facilities in Texas and Florida. Sovran has maintained a conservative debt profile with an investment grade credit rating from Fitch, BBB- Positive, and Standard & Poor’s, BBB- Positive. Debt maturities have been wisely staggered allowing for flexibility in future capital requirements.

Among its peers, Sovran’s 3.3 percent dividend yield is well above the 2.8 percent median. Nonetheless, REITs on average have yielded 3.5 percent. Also, the dividend payout ratio has been conservative (even when comparing to other sectors within the REIT space).

Valuation

Since 2011, year-end price-to-FFO has fluctuated between 17.5 and 21.3 for a median of 18.7. Projected FFO for 2015 is $4.79 and the year-end target stock price is $89.49. With the stock currently trading slightly above this level (Stock price on 13 April 2015 was $91.22), the market seems to have priced in 2015 growth.

Metrics

2011

2012

2013

2014

2015P*

Dividends declared per common share, $

1.80

1.80

2.02

2.72

3.00

Q4 Dividend, $

0.45

0.45

0.53

0.68

0.75

Dividend payout ratio, percent

65

55

53

62

Dividend yield, percent

4.2

2.9

3.1

3.1

3.4

FFO per share, $

2.43

3.14

3.72

4.09

4.79

FFO per share (Q4 only), $

0.73

0.77

0.98

1.08

AFFO per share, $

2.75

3.28

3.83

4.37

Debt to Enterprise Value, percent

33.4

26.4

22.7

21.1

Debt to EBITDA Ratio

5.3x

5.4x

3.9x

4.4x

Revenue Growth – Total, percent

9.9

16.4

16.8

19.2

Revenue Growth – Same Store, percent

4.2

6.3

7.7

7.5

5.5

NOI Growth – Same Store, percent

6.2

10.3

9.9

9.1

6.5

Occupancy – Same Store, percent

82

87

89

89

Share Price on 31 December, $

42.67

62.10

65.17

87.22

89.49

P/FFO on 31 December, $

17.6

19.8

17.5

21.3

18.7

*2015P = 2015 Projection

Takeaway

Sovran is a solid growth stock whose 2015 projected growth has been priced in by the market.

The company will release Q1 2015 financial results on April 30 at 9am EST. Looking forward to it!

Written by Heli Brecailo Disclaimer This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy. Disclosure The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.​